Daily Archives: February 11, 2010

Standard and Poors has revised its outlook for Estonia from negative to stable because of improved public finances.

“We believe Estonia has stabilized its public finances, which significantly increases its prospects for Eurozone accession in 2011. We are affirming our ‘A-/A-2′ long- and short-term sovereign credit ratings on Estonia,” said the ratings agency. 

Between 2010 and 2014, $1,400bn US commercial real estate loans will reach the end of their terms. Nearly half of them are currently in negative equity – that is, the borrower owes more than the property is worth. And banks are reducing the number of loans in the sector, and have been doing so throughout 2009.

More shocking is that banks and their auditors are typically well aware of the problem, but have not written down the value of property as prices have fallen. Instead they are “extending and pretending” – or “delaying and praying”: holding property values steady and assisting the borrowers where possible. They need to. If banks were accurately to record property values, they would write down assets on their own balance sheets and jeopardise their business (see example to right).

A very thorough report just released from the Congressional Oversight Panel expects many banks to go under when the pretence comes to an end. The report concludes: “There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public.”

When a government body admits things are at crisis proportions, you have to take notice. This isn’t journalistic hyperbole. It is hard to overstate the impact of the coming second subprime, hitting, as it will, a very fragile economic recovery.

So, who will be most affected? In a nutshell, banks, and mostly the smaller ones. 

Ralph Atkins

I am not sure I agree with my colleague Chris Giles’ analysis of today’s Brussels deal on Greece. Look at it this way. A year ago we knew that if the worst came to the worst, other eurozone countries would help a struggling member. Peer Steinbrück, Germany’s former finance minister, had told us as much.

Now, what’s new today? Not very much. There is pledge of “determined and co-ordinated action if needed to safeguard stability” in the eurozone but as yet no concrete offers of financial assistence (whatever Socialists leaders might have said). One could argue that ”determined and co-ordinated action” could also include simply making sure Greece sticks to its pledges of fiscal prudence. In other words, the policy of “tough love” remains in place. 

Chris Giles

Three wonderful ironies stand out from the tentative eurozone plan to back Greece in its hour of need. The Eurogroup’s leaders have agreed to pressure Greece to shore up its public finances, use International Monetary Fund expertise to help set the framework for reducing borrowing, but back Greece with an offer of emergency funds if it required liquidity and could not borrow in the markets. Socialist EU leaders issued a statement last night, talking about “a last-resort mechanism of financial support, coupling lending by private banks with a guarantee to be provided by eurozone members”. 

Nigeria’s central bank is honing plans to categorise banks by region or speciality. The idea, discussed in January, would reject the current banking model in which all banks are all things to all people. 

The Swedish central bank has kept the repo rate at 0.25 per cent, but brought forward the likely date of first rise to summer or autumn and substantially increased its inflation forecast for 2010.

Economic recovery is on more solid ground, both in Sweden and internationally, the Riksbank believes. “The risk of a major setback in the recovery of the economy has declined and that the upturn therefore rests on more solid ground,” said the statement

Robin Harding

A Japanese contact, who shall remain nameless, recently urged me to read the questionnaire that US academic Adam Posen submitted to the UK’s Treasury Select Committee last July before he became a member of the Bank of England’s Monetary Policy Committee.

Mr Posen is an expert on Japan’s lost decade who wrote two books on it in 1998 and 2000. His answer on Japan is both an excellent summary of the lessons – such as the limitations of quantitative easing – and revealing on how Japan’s economic situation hasn’t developed quite the way that anybody expected.

It is worth reading in full – question 10 on page 8 – but I’ve posted a few of the most interesting paragraphs below. 

Eurozone members will effectively lend their credit ratings to Greece, to tide the country over with affordable debt while it sorts out its finances.

Financial support will probably come from private banks coupled with loan guarantees from member states. This seemingly roundabout process keeps the liabilities off states’ balance sheets but means banks will lend to Greece at rates they would otherwise reserve for Germany, or France, for example.

Other options involving actual cash – such as accelerating disbursements of EU regional aid funds to Greece – have been met with extreme reluctance by member states. 

Chris Giles

In trying to understand how the Bank of England responds to economic news and ideas, it is important to know how its forecast changes every three months to understand the big picture of the Bank’s thinking on the economy. But this is impossible because the fan charts are a bad graphical representation of the Bank’s view. I have told the Bank many times why the fan charts are rubbish, but not until now written down the reasons.

Here are the Bank’s growth (green) and inflation (red) big pictures published from November (left) and February (right).